Price Elasticity of Demand for FIFA Match Tickets - Essay Example

Topic: Own Price Elasticity of Demand for FIFA World Cup Final match tickets 1. Introduction This paper focuses about factors affecting supply and demand for FIFA World Cup Final match tickets. An analysis will also be made in the concept “own” price elasticity of demand and principle will be applied to FIFA World Cup Final match tickets. II. Aims This paper aims to help a decision maker in helping him attain his or his objective in profit planning and forecasting activities. III .Analysis Proper III.A. Definitions of demand, supply, and price What is a demand? Demand is the fusion of two conditions. A consumer demands a good or service whenever he wants some thing-tangible-or intangible-and has the means at his disposal to acquire the thing. (Cole, page 13) What is a supply? By supply, we mean we mean the quantity of a good that business willingly produce and sell. More precisely, we relate the quantity supplied of a good to its market price, holding equal other things such as cost of production, the prices of related goods, and the organization of the market. (Sameulson and Nordhaus , page 52) What is price? “Price is amount of money for which a unit of goods or services is exchanged. It is equivalent to market value and may or may not measure the intrinsic value of the goods or services to the buyer or seller. Most economists hold that, in the long run, price in a competitive market will equal the cost of production. Such a long-term equilibrium price is called the normal price….”  What is “own” price elasticity of demand? Price Elasticity of Demand (sometimes simply called “price elasticity”) measures how much the quantity demanded of a good changes when its price changes. ( Sameulson & Nordhaus, page 65). “Own” is used as modifier in the term being defined to fix the perspective, i.e. in order not to confuse it with other good’s price. III.B. Relationship of demand, supply and prices The relationship of the three could be shown by the work of Samuelson and Nordhaus about a demand shift below: P S1 P2 E2 P1 E1 D2 Price D1 Q1 Q2 Q Figure I. Illustration of the relationship of price, supply and demand. The supply curve is represented by S1 while the demand curves are represented D1 and D2. D1 meets S1 at E1, this is the equilibrium before the shift to D2. This equilibrium illustrates the balance between availability of goods or services in the market and demand for said product or service. The graph clearly illustrates the the increase in demand from D1 to D2, and it resulted to an increase in price and quantity required to arrive at a new equilibrium point on the supply curve (S1). The supply and demand curves intersecting in the graph explains the law of supply and demand which in turn determine that the value of a good or service which is measured in terms price. Samuelson and Nordhaus said, “The analysis of the supply-and demand aparatus can do more than tell us about the equilibrium price and quantity. It can also be sued to predict the impact of changes in the economic condition on prices and quantitites.” (Samuelson and Nordhaus,56) The law of supply and demand as illustrated in the above in one of the basic economic models which economists used in their their their study of the different econonies in the world and even in explaining the competition among different firms in a given industry or industries. As a general rule economists claim where demand exceed supply, there is shortage but where supply exceeds demand there is a surplus. It is the shortage that will push prices up and it is the supply that will push prices down. D1 and D2 curves represent different levels of demand. D1 curve shifting to D2 indicates that there is an increase in demand that may be brought about by factors affecting demand like increase in people’s income. The S curve could also shift left or right depending on the factors affecting supply. At this point, we have to understand that there is relationship among the three variables, demand, supply and prices. In the nature of things, demand, would come first before supply and prices is function of measuring value. Human beings are born with needs and wants. From the moment life begins there is a need. There is need for food, shelter and clothing. Life is made that way that no amount of debate will deny that big reality. Needs and wants are motivations for people to find their answer. They need to be satisfied. If a person can satisfy his own need without the help of other, then it is the best thing to happen. But although we accept that a person may satisfy his own, there are a lot, which must be satisfied by others. Hence, we say to the doctor: “Heal yourself.” Since humans live in a community where society allows the interaction among each other and the capacity of a member of society to share what he has and can do and try to have from other what he has not and what he cannot do, society came with the concept of value which is measure in terms of money. Therefore, we call the value, price expressed in a currency for each independent state in the world. Value therefore for all kinds of human beings may be the same but different states expressed them in their own currency, like dollars to the Americans, pounds to the U.K. people. However, in the international scene, one currency can be converted into another country’s currency, which is a living proof that value is present measure in prices. Value, measured in prices, is therefore a reality among all nations in the world. It is safe to start assuming that the more number of people who need a certain product or service, the greater is the number of people competing for a limited resource in the economy. It must be assumed that resources in the economy are finite. One cannot have an indefinite amount of food supply because the resources that we have on earth are limited. They are finite in the sense that they are measurable and identifiable largely. Given such assumption, it can be deduced that the greater the number of people needing something, the greater is the pressure of the people to compete for the limited resources and therefore the greater is the value of that need and among competing persons who need the resource. Because of that, they are willing to pay some thing in exchange depending on their capacity to do which is expressed economically in currency. Hence, comes the concept of wealth, which constitute the power of a person in the community to acquire what he needs and such wealth is an accumulation of measured value which he has in his power to discharge as long as he has. Such wealth may increase depending on how much he has from his benefactor and the fruits of his labour. The same may be lost also through spending or living lavishly beyond means or simply because there is no chance to increase the same because of lack of employment or because of economic difficulties. On the supply side, it would mean that the greater the dammed for the good or service, the less is the supply that is available for the demander because of the finite amount of resources. Hence, we can say that there is an inverse relationship between demand and supply. Since we posited that price is a function of demand by saying that more need pushes higher prices, such force is counterbalanced by supply, which seems to be saying, “I will provide you the product or service with a given value.” Hence, we say then that the greater the supply in the number of goods, the less is the price because in a sense it makes the value of the product less valuable, as more persons are willing to provide the service or products in a competitive world. When the demand and supply meets, we have the so-called equilibrium economics. Equilibrium is a point where there is someone willing to buy at a certain price and there is someone willing to sell at that given price. When there is equilibrium, an exchange could freely take place. To summarize, we say that the higher the demand the higher the price, but the higher the supply, the lower the price. III.C. Factors Affecting Demand and Supply C.1 Factors Affecting Demand The following are factors that may affect demand FIFA World Cup Final match tickets  1. The good’s own price- This means that the higher the price, the lower the quantity demanded. This case of influencing demand by the good’s own price is explaining customer’s behaviour that if the price of FIFA World Cup Final match tickets is increased, the would-be buyer would less likely purchase the same because he has also a limited wealth. For some buying FIFA World Cup Final match tickets is a necessity as but for some it may be not. 2. Average income ---This means that as people’s income rises, people increase FIFA World Cup Final match tickets. This explanation assumes the fact that if a person has satisfied his basic needs and all other things being equal, and his salary or income increases, his decision would be to buy a FIFA World Cup Final match tickets to afford him some leisure or entertainment. 3. Population – Increase in population also increases FIFA World Cup Final match tickets purchase. This is an economic phenomenon that all other things being equal, an increase in population increase desire for leisure hence more people will buy FIFA World Cup Final match tickets. This must not be difficult to assimilate since more people will need more FIFA World Cup Final match tickets. 4. Prices of related goods. Lower prices of substitute products decrease the demand for FIFA World Cup Final match tickets. T 5. Tastes- Europeans prefer FIFA World Cup Final match tickets to their non-European counterparts, other being things equal. Many times demand for match tickets exceeds supply because of the popularity of the matches. 6. Special influences- These factors may include relaxing rules on who are eligible to watch the matches. Making the cut-off age from 18 years to lower may encourage younger buyers to buy FIFA World Cup Final match tickets. C.2. Factors Affecting Supply For FIFA World Cup Final match tickets 1. The good’s own price. This higher own price increase most profitable production level and raises quantity supplied. Higher prices encourage providers to sell more tickets. 2. The technology --Computerized operation lowers production cost and increases supply. This is particularly true like in the case of on-line selling of tickets. 3. Input price – Higher wages for employees of provider of FIFA World Cup Final match tickets results or higher cost of equipment results in higher production costs and therefore supply is decreased. 4. Prices of related goods. If prices of concerts or other entertainment events are increased, sale FIFA World Cup Final match tickets will increase. 5. Market organization – This may mean increasing the number of sales outlets for tickets. Doing so may increase the number of sold tickets. 6. Special influences - These factors may include increase in taxes for FIFA World Cup Final match tickets. This means that if the provider of FIFA World Cup Final match tickets pays more taxes, said providers are in a sense discouraged and supply for FIFA World Cup Final match tickets may decrease. III.D. Own Price Elasticity of Demand Economics book authors Paul A. Samuelson & William Nordhaus described elasticity as follows: “Elasticity is a term used in economics to denote the responsibility of one variable to changes in another.” It is defined as the percentage change in a variable “caused” by a percentage change in an independent variable. Below is the formula to compute the same: %  in a dependent variable Elasticity = ----------------------------------- %  in a independent variable While elasticity can be calculated and used for, any two related variables one of the basic coefficients of elasticity is the Own price elasticity of demand. The others are income elasticity, cross elasticity and elasticity of supply. Only own price elasticity of demand is discussed in this paper. Own price elasticity of demand is the measure of the percentage in the quantity demanded “caused” by a percentage change in the price. There is an inverse relationship between price and quantity; hence, the coefficient of price elasticity will always be negative. However, according to Samuelson, for convenience, we treat all percentage changes as positive so that elasticity is always a positive number. Samuelson gave us the following formula to compute price elasticity of demand. Price elasticity of demand = % change in quantity demanded ----------------------------------------- % change in price Price elasticity could be either point price elasticity or arc elasticity. To compute point price elasticity, we have Q P1 Ep = ---- * ---- P Q1 Where: Q is the change in quantity; P is the change in price; P1 is the original price and Q1 is the original quantity. To compute for arc elasticity, the formula is Q ----------- (Q1 + Q 2)/2 Ep = -------------------------  P --------------- (P1 + P 2) /2 Q is the change in quantity P is the change in price P1 is the original or price, Q1 is the original quantity P2 is the new price Q2 is the new quantity III. E. Application of Own Price Elasticity of Demand Let us apply the formula above given the following data: Table I. Average price of FIFA Final match ticket in relation to number of tickets in thousands. price demand supply 50 3,000.00 1,500.00 100 2,800.00 1,800.00 150 2,600.00 2,000.00 200 2,500.00 2,200.00 250 2,450.00 2,400.00 300 2,200.00 2,600.00 350 2,100.00 2,800.00 400 2,000.00 3,000.00 When we graph Table I, it will appear as follows: When prepare the elasticises based on table I, we have the following: Q  Q P  P (Q1+Q 2)/2 (P1+P 2) /2 Ep 3,000.00   50         200.00   50 2900 75 0.10 2,800.00 100 0   200.00   50 2700 125 0.19 2,600.00 150 0   100.00   50 2550 175 0.14 2,500.00 200   50.00   50 2475 225 0.09 2,450.00 250   250.00   50 2325 275 0.59 2,200.00 300   100.00   50 2150 325 0.30 2,100.00 350   100.00   50 2050 375 0.37 2,000.00 400       It must be noted in Table II that above demand is elastic if Ep is greater than 1; if below 1 it is inelastic; and it is equal to 1, it is unit-elastic. Demand for FIFA tickets is found inelastic because Ep is less than one through out. This might explain the high demand for FIFA tickets. To avoid confusion as to which is the denominator in point price elasticity, we use the average price and average quantity under the arc elasticity. Conclusion We have found that consumer behaviour is actually affected by the law of supply and demand and each variable is influenced by different factors for decision-making. For some the relationship is direct and for some, the relationship is inverse, and for some there is just no relationship. Hence, in an economic society people are assumed to be making rational choices and given capacity to decide where would they spend their wealth. Knowledge of the law of supply and demand and knowledge about the price elasticity of demand is major weapon on the part of the FIFA matches organizers. As found, FIFA tickets is demand inelastic given the assumed figures. Recommendation: I recommend the use of the principle leaned in this regarding the price elasticity of demand. Knowing this model is one thing but actual analysis of the given data may be another things. However, a proper and careful analysis of data should be made to avoid errors in arriving at a valid conclusion and subsequently effective and correct decision-making. No. of words: (more or less 2500 without the tables ) Bibliography: 1. < http://fifaworldcup.yahoo.com/06/en/050124/1/3041.html> 2. < http://fifaworldcup.yahoo.com/06/en/050609/1/3u5t.html> 3. < http://www.answers.com/price > 4. 5. 6. Cole, Charles L, Microeconomics, a contemporary approach, Hardcourt Brace Jovanovich, Inc. International Edition, under Editorship of William J. Baumol, Princeton University, New Jersey, USA, 1973) 7. Samuelson, by Paul A.,& Nordhaus, William, Economics, fourteenth Edition, McGraw-Hill, Book Company, U.S.,1992 Proof of Publication For Paul Samuelson Library of Congress Cataloging-in-Publication Data Samuelson, Paul Anthony Economics/ Paul A. Samuelson, William D. Nordhaus-14th edition ISBN 0-07-054879-X For Charles L. Cole Library of Congress Catalog Card Number: 72-94219. ISBN: 0-15-558620-3 Read More